With the brakes on

Hydropower is the backbone of power supply in Switzerland. To remain so, investments must be made to preserve existing power plants. A study by the Swiss Water Management Association (SWV) indicates that some 500 million francs per year would be required to achieve this. However, it will hardly be possible to earn enough with hydropower over the next ten years to fully realise these investments according to the SWV.

Hydropower plays a key role as the backbone for energy supply in Switzerland in the new energy law adopted by Swiss voters in September 2017. By the year 2035, run-of-river and storage power plants will produce 37.4 TWh of electricity per year, corresponding to a net growth of 1 TWh as compared to current production.

Hydropower infrastructure and production can only be sustained in the long term if enough replacement investments are made in existing power plants. According to the Swiss Federal Office of Energy (SFOE), hydropower plant upgrades and maintenance will cost about 30 billion francs between 2010 and 2050.

A majority for the support of hydropower

The Commission for the Environment, Spatial Planning and Energy (UREK) wants to support domestic power production in order to preserve it in the long term and approved a Council of States motion to this end.

About 40 % of domestic production will be eliminated with the decommissioning of the nuclear power plants in Switzerland. The Council of States is concerned that hydropower will not be adequately expanded to compensate this shortage owing to low power prices. What's more: The expansion potential of hydropower in Switzerland is no longer very promising because it is already being used quite extensively today. As a result, renovation and increasing the efficiency of existing plants are more important than ever.

The National Council is not counting on future market design alone, but also wants to investigate subsidies and other support instruments. UREK supported this motion with 13 to 10 votes.

However, the Federal Council rejected the motion. In a statement, it notes that market premiums for large-scale hydropower plants were limited to five years. For the time-being security of supply is not a problem. A market design that would ensure long-term power supply will go into the consultation process this year.

New study

Based on collected data and two other methods (book value method/replacement cost method: details here/Heft 2 – 2018) the Swiss Water Management Association (SWV) made estimates as to how high the yearly investment requirements would be in order to maintain existing Swiss hydropower plants. "SWV's extrapolation indicates that from 2011 to 2022 an average of 200 million francs would have to be invested in run-of-river power plants and 280 million francs in storage plants. In other words, a total of 480 million francs per year would be needed to maintain the plants.

However, the actual investments made in the period from 2011 to 2017 decreased significantly (see graphics): For run-of-river power plants from some 70 kCHF/MW to about 30 kCHF/MW, and for storage power plants from 35 kCHF/MW to 15 kCHF/MW (kCHF = thousand Swiss francs).

Too little income

The general question according to the SWV is whether hydropower producers will be able to generate the approx. 500 million francs per year for replacement investments in the medium and long term.

A comparison of prime costs with expected market prices for electricity based on a recent study by the SFOE (storage power plants 7 cents/kWh; run-of-river power plants 5.7 cents/kWh; details here in ED Online) presents a significant cost/income gap (see graphic below). This is the case even when taking into account the additional income that power plant operators can generate through ancillary services: Hydropower profitability will not be able to "…generate an adequate return on equity up until at least 2025. Therefore, it must be assumed that only the most urgently required replacement investments will be made in this market environment."

Average costs for run-of-river (dashed) and storage power plants (dotted) according to the SFOE (Study 2018) and power price model on the Swiss spot market according to Pöyry (2017)

The lacking replacement investments have resulted in asset erosion and an increased risk of outages, which could lead to a decrease in production and a negative impact on the security of supply in Switzerland.

To the SWV it’s obvious: To counteract this trend, framework conditions must be adapted to prevent the collapse of Swiss hydropower during economically difficult times. This is the responsibility of “law-makers, society and the economy after saying “yes” to the Energy Strategy, and at the same time advocating for a strong domestic, renewable hydropower production."

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Axpo Finland was established in 2009 in order to strengthen Axpo's market presence in the eastern parts of the Nordic region. From its office neighboring Helsinki airport, Axpo Finland offers standard and structured products as well as other commodity related products. Axpo Finland is a subsidiary of Axpo Nordic which consists of 40 employees with extensive experience of the energy market. We have offices in Oslo, Malmö and Helsinki. The companies are a part of Axpo Group, a Swiss energy company active in over 30 countries throughout Europe and the USA.